Texas Attorney Blog

Although I am primarily a Texas oil and gas attorney, I am interested in all energy sources, and I am especially interested in the ongoing national discussion about what are called alternative energy sources. One of the hottest topics in the world of energy is the discussion of alternatives to fossil fuels. While the definition of "alternative energy" has changed over time, the discussions today center on energy sources other than oil, gas and coal, and include such energy sources as solar, wind, biomass, hydrogen, and geothermal energy. These discussions are presumably driven by concerns over America's dependence on imported oil and the effects of allegedly manmade climate change. Often, advocates of alternative energy sources make extravagant claims when touting their alleged benefits when compared to fossil fuels. One alternative energy website says that alternative energy sources “have no undesired consequences”; in fact, some people claim that alternative energy sources “are renewable and are 'free’ energy sources." The move from traditional to alternative energy sources is not only touted as the solution to a whole host of environmental problems, but the Obama administration says the “green jobs” resulting from this shift are a key to economic recovery and the basis of a strong middle class.

Alternative energy sources seem to offer the world a future environment free of the deleterious effects of obtaining and burning fossil fuels and an economy growing rapidly and unfettered on the back of unlimited and free (e.g. no cost) energy and a green jobs revolution. It sounds almost too good to be true.

The question is: is it? Is alternative energy a “no cost” solution to all our environmental, energy, and economic problems? Well, as Robert Heinlein popularized in his classic science fiction novel, The Moon is a Harsh Mistress, TANSTAAFL (“there ain't no such thing as a free lunch.”). Everything comes with a cost—even in the Brave New World of alternative energy. These costs seem to get lost in the hype.

Continue reading " A Texas Oil and Gas Attorney Examines the Pros and Cons of Alternative Energy " »

As the price of oil creeps back up, the pace of oil and gas leasing has picked up as well. As a Texas oil and gas attorney, I regularly get calls from folks who ask me why they should go to the expense of having an attorney review their oil and gas lease. Here are the reasons I hear for not consulting an attorney, and my response to each, explaining why consulting an attorney is important:

1. "The landman told me that the lease was just a standard form". Watch my lips on this one: there is no such thing as a standard oil and gas lease. The landman may have meant that the lease they offered was standard for that particular landman, or for the particular oil company the landman was representing. However, there is simply no such thing these days as a standard, industry-wide form.

2. "The lease did not look that complicated". If you are not an oil and gas lawyer, do you really know what the terms in that lease mean? Do you know when words in the lease have one meaning in ordinary use and another meaning in the oil and gas industry? Even more important: do you know what's missing?

3. "I'm getting the bonus and royalty I want, so why should I care about the fine print?" The truth is that what is in the body of the lease, in the "fine print", can have a greater impact on your pocketbook in the long run than the amount of the bonus or royalty. In some cases, depending on the lease, the financial gains to you of a few changes in the lease can result in much greater compensation to you than what you receive in bonus and royalty!

4. "The lease said it had a term of only three years, and that's not very long so I didn't think what the lease said was that important". Oil and gas leases have a "primary term" of between two to five years. The oil and gas company, with some exceptions depending on the exact language of the lease, must drill a well within that time that is capable of producing oil or gas in commercially paying quantities. If they do not, (again, subject to various exceptions and extensions used in some leases), then the lease expires. If they successfully drill a well within the primary term that is capable of producing oil or gas in commercially paying quantities, then the lease will go on for so long as the well produces in commercially paying quantities. That means that the term of that lease may go on past your lifetime. Since it is possible that the oil and gas lease you sign may go on for a long, long time, isn't it just common sense to make sure that it's a lease you can live with for that long?

5. "The landman was just so nice". Yes, he was nice. It is his job to be nice. If he wasn't nice, he would have been fired a long time ago. Secondly, whether the landman was nice or not, the landman's legal allegiance is to the oil and gas company the landman represents, and not to you.

6. "It costs too much to see a lawyer". There are many oil and gas attorneys in Texas whose fees are not only reasonable, but whose rates are a fraction of the amount of damage that can be done to your land because of an improper agreement. In addition, the attorneys fees are sometimes offset by the increased bonus payment as the result of a lease negotiated by an attorney. Finally, this lease may last your lifetime. Doesn't it make sense to be sure you can live with it?

7. "The oil and gas company promised me everything I wanted, so I didn't care if it was actually written in the oil and gas lease". Unfortunately most (there are a few exceptions) verbal promises by the oil and gas company or its landman are not enforceable under Texas law.

8. "The landman told me I had to sign right away, or they would withdraw their offer and I wouldn't get the money they were offering". It usually takes a while to lease all the acreage that the oil and gas company is required to lease before they drill. There is rarely a situation where it is truly a case of "sign right now or no deal".

9. "My mineral interest is so small, the oil company wouldn't make any changes anyway". It is certainly true that someone who owns many acres and owns 100% of their minerals will have more leverage with the oil company than someone who owns a small fractional interest in a few acres. However, sometimes even small interests count, when it is just those interests or acres that the oil company needs to make up its production unit. Secondly, many times owners of small interests, such as family members, go together and retain me to negotiate their lease, and together, they have more leverage than they did acting individually. In my office, the cost to review, evaluate and negotiate a lease is the same whether it's for one family member of twenty. Finally, most oil and gas companies are reasonable, and are open to making reasonable changes even when your interest is small. The key is to have someone who is experienced and who knows what changes are appropriate to ask for given the size of your interest. Even small changes can make a big difference in the overall fairness of a lease.

10. "I want to negotiate my own lease and save the money I would have spent on an attorney." Unless you have experience in negotiating an oil and gas lease, you are almost always not going to get the best deal for yourself. Landmen can spot an inexperienced person a mile away, and they are not going to cut you any slack! Remember, their loyalty is to the oil company, and not to you.

If you get an offer from an oil and gas company or its landman, simply smile and say: "Thank you. I will seriously consider this. I will send it to my attorney promptly and we will be in touch with you soon". And then call your attorney!!

As a Texas oil and gas lawyer, I have followed with interest the proposals to add new regulations for onshore, as well as offshore, drilling in the wake of the Gulf of Mexico oil spill. Several initiatives to tighten federal regulation of offshore drilling are making their way through the halls of Congress. These bills are perhaps inevitable, considering the magnitude of the spill, the confused federal and BP response to the spill and the adverse public reaction to both the spill and the subsequent mitigation and clean up efforts. At the same time, however, environmental groups and some in Congress are using the push for new offshore drilling regulations to call for tighter federal rules for onshore oil and gas drilling. These new regulations are designed to make it more difficult for oil and gas companies to start drilling in the first place, and to more closely monitor their post-drilling operations for alleged threats to public health and the environment.

It's perhaps a little too simplistic to blame the BP spill for the new regulatory push onshore. Given the Obama administration's stated goals of favoring alternative energy and the environment over the pro-drilling energy policies of the Bush administration, perhaps new regulations were inevitable. But the debate appears to have taken on greater urgency in some quarters. As Kevin Book of Clear View Energy Partners says (referring to shale drilling), “the perception of risk has changed, and the reason for it can be summed up in one word—Macondo.”

The first signal of new regulations to come surfaced in May, when Interior Secretary Ken Salazar announced tighter regulations for oil and gas drilling on public lands. These new rules make it much more difficult for oil and gas companies to obtain drilling approval, and drilling on certain public lands would require a period of public comment. While environmental groups praised the regulations as reversing the allegedly destructive Bush administration drilling policies, the Independent Petroleum Association of the Mountain States (now the Western Energy Alliance) stated in a press release that the new rules would “delay the development of clean, domestic natural gas on Western federal lands.”

The desire for tighter regulations focused Congress' attention on two bills introduced over a year ago. One, the Consolidated Land, Energy, and Aquatic Resources Act (the CLEAR Act), passed the House on July 30, 2010 and went to the Senate. Among other things, the bill requires oil and gas companies engaged in drilling on federal lands to adopt “best management practices” designed to minimize threats to health and the environment; requires public disclosure of the chemicals used in drilling or hydraulic fracturing (often referred to as "fracing" in the oil industry or "fracking" by the media); and repeals 2005 legislation allowing companies to drill on public lands without a full environmental review process. Another bill, the Fracturing Responsibility and Awareness of Chemicals Act (the FRAC Act), originally introduced last summer, specifically targets the practice of hydraulic fracturing by removing the exemption of the practice from regulation by the EPA under the Safe Drinking Water Act. This bill and a companion bill introduced at the same time in the Senate have never come up for a vote. Similar language was stripped from the CLEAR Act, but the Clean Energy Jobs and Oil Company Accountability Act, introduced in the the Senate by Majority Leader Harry Reid (D-Nev.) would require companies to make their fracing formulas public on the Internet.

While the ultimate fate of all these bills has yet to be determined, these initial efforts to increase federal regulation of onshore drilling spurred calls for even further regulation. In late July 2010 a number of environmental groups, including the National Audubon Society, the Natural Resources Defense Council, and the Sierra Club, sent a letter to Senate Majority Leader Harry Reid and Speaker of the House Nancy Pelosi, urging the passage of new onshore drilling regulation to target what they call the damaging environmental and health effects of current practices. In addition, they urged an end to tax benefits for oil and gas companies, more federal money for research into public safety and environmental protection, and an end to “fast-track” approval of oil and gas drilling on federal lands.

What impact will increased federal regulation have on domestic oil and gas drilling? Only time will tell. Oil and gas companies oppose federal regulations, saying that existing state regulations are quite sufficient to protect the environment and public health and safety. Marc Smith, the executive director of the Western Energy Alliance, points out the folly of giving more oversight of onshore drilling to the same federal regulators who failed to prevent the BP oil spill: “It doesn't make sense to take more control away from state oil and gas regulators and give it to the federal agency that just oversaw the worst environmental catastrophe in the history of our nation.” Here in Texas, for example, we have the Texas Railroad Commission, which does an excellent job of regulating oil and gas drilling and production. Industry representatives also claim that the regulations embodied in the CLEAR Act will make drilling on public lands more expensive, increase Government control over the market, and create a new and unnecessary layer of bureaucracy.

There is an economic and national security aspect of these proposed regulations that sometimes gets lost in the debate. If regulations for onshore drilling are increased, oil companies will need to spend more time and money in compliance. That means the cost of oil and gas and the products derived from oil and gas will increase for consumers. In addition, increased regulation will almost certainly mean fewer wells will be drilled, and this will result in even greater unemployment for workers in the oil and gas industry and all the many industries that service the oil and gas companies (the majority of which are small businesses). Ultimately, if the higher regulatory cost leads to lower domestic production, we will have to increase, rather than decrease, our reliance on Mid-East oil. This factors should make us consider carefully: is increased reulation is really the direction we should be heading?